'Bond bubble' will not pop, say bouyant advisers
Warnings to investors that the 'artificially high' gilts market is about to collapse are dismissed by many City fund managers. Simon Read reports
Sunday 29 November 2009
Bonds have been the investment story of the year but it could be time to take profits and get out, according to a leading fund manager. Robin Geffen, the chief executive of Neptune Investment Management, warns that bonds are being kept artificially high, leading to a risky bubble.
"When the Government borrows 12 per cent of GDP in a single year and the Bank of England buys, ahem, 12 per cent of GDP worth of government bonds in one year under its quantitative easing programme, I believe that the price is being kept somewhat artificially high," he says.
"Is the government deficit likely to close next year? Not by much. Is the Bank of England likely to repeat its trick next year? No it isn't. So I believe that there is a bond bubble."
Investors have piled into gilts – government bonds – and corporate bonds during the course of 2009 as they fled the fluctuating equity markets. According to figures from the Investment Management Association, almost twice as much was invested in bond funds in the year to the end of September as it was in equity funds. Some £10.3bn of investors' money flowed into bond funds during the 12 months compared to just £5.9bn into equity funds.
While September's figures showed a slight reversal of that trend – and October's figures, which will be published tomorrow may reveal a further focus back on equity funds – if Geffen is right, many investors could be taking a major risk by leaving their money in bonds.
However, it's not too difficult to find rival experts happy to take up a contrary position to Geffen. Many believe that, far from there being a bond bubble, bonds still offer excellent opportunities for investors.
"Investors are obsessed with bubbles at the moment," complains Gary Reynolds, the chief investment officer at Courtiers. "There is no bond bubble so it will not burst. The last time that gilt prices crashed was in the 1970s when we had supply-side problems and rampant inflation. Today, there is stacks of supply and inadequate demand which means bond prices will not collapse."
Brian Dennehy, the managing director of Dennehy, Weller & Co agrees that there is no bond bubble. "Broadly, prices are back to where they were a couple of months before Lehmans went bust," he points out. "There's still lots of value in bank bonds compared to where they were in, say, 2007."
But he advises investors to lower their expectations. "You're not going to make 50 per cent in the next six months, as you might have done in the last six months. I'd expect returns of between 5 to 10 per cent per annum over each of the next three years."
Bonds work as a form of IOU, meaning that when you buy a bond you are, in effect, lending the issuer money which it promises to pay back on a specified date. They normally last set periods such as five years and, in the meantime, pay interest.
It's that interest – or yield – which makes them attractive, particularly when savings rates have hit rock bottom and remained there for most of the year. But during that time, yields have narrowed, leaving bonds looking less attractive and over-invested.
"With government bonds, yields are low because interest rates are at unprecedented low levels, which reflects a lot of uncertainty about the global situation," says Chris Iggo, the chief investment officer at Axa Investment Managers. "However, the corporate bond market is still attractive as the yield is much higher than with gilts. I believe corporate bonds with maturities of one to three years are still a good place to park your money."
Adrian Lowcock, a senior investment adviser at Bestinvest says: "As a result of the rise in capital values we have reduced our exposure on corporate bonds but remain positive on the sector. Investors should look to get exposure through Strategic Bond Funds such as M&G Optimal Income or Legal and General Dynamic Bond."
However, Paul Feeney, the head of distribution for BNY Mellon Asset Management, says investors wanting income should start looking at equity income funds. "Newton has a range of four funds offering yields ranging between 4.8 per cent and 8.8 per cent from investing in blue chip global companies," he says. "These funds offer good investment opportunities for investors looking for income in 2010, as well as a diversification away from a saturated corporate bond market."
Debt in Britain: Numbers seeking help on how to cope with mounting bills goes up by more than half in three years
Bargain Hunter: BT improves its mobile reception with 'incredibly competitive' deals
Help to Buy Isa Q&A: Are they real help for first-time buyers or simply a vote-winner for the 2020 election?
Offset your mortgage and save thousands
Simon Read: 'It went below the radar but you could be eligible for a tax break on your savings'
- 1 Germanwings crash: Captain of doomed plane was only 'on board because he changed job to spend more time with his children'
- 2 Ohio Democrat Teresa Fedor speaks out during abortion debate to reveal she has been raped – and is interrupted by laughter from Republicans
- 3 Gamers confess the worst things they've done in The Sims
- 4 Germanwings crash: 'Andreas Lubitz planned to marry pregnant girlfriend', claims German report
- 5 Germanwings plane crash: Transcript reveals passengers 'screamed for over five minutes' before plane crashed into mountain
Ukip supporters are 55 or older, white and socially conservative, finds British Social Attitudes Report
Street preacher quoting from the Bible fined for calling homosexuality an 'abomination'
Jeremy Clarkson sacked live: Alan Yentob 'wouldn't rule out' ex Top Gear host's BBC return
Woman filmed launching racist tirade against men on the Tube for speaking in 'own lingo'
The West has it totally wrong on Lee Kuan Yew
David Cameron calls Labour 'hopeless, sneering socialists' while announcing 7-day NHS plans
iJobs Money & Business
£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...
£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...
£18000 - £20000 per annum: Recruitment Genius: A Client Services Assistant is ...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
Day In a Page
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station